Gilles Moec Macrocast: Best Laid Plans Go Awry
- 07 October 2024 (10 min read)
While they both converted to “restriction removal”, it seemed until last week that the Fed and the ECB had laid out different plans, the Fed opting for a decisive, pre-emptive path, while the ECB was choosing a more prudent, data dependent and meeting-by-meeting approach. Yet, the employment report released last week provided more evidence that the softening of the US economy is proceeding at a glacial pace, while Christine Lagarde’s latest testimony at the European parliament expresses a readiness to engage in back-to-back cuts, the Governing Council – even its hawkish wing – getting more concerned about the deterioration of the real economy.
We think the payroll report for September “killed” the probability of a 50bp cut in November in the US. Still, given the FOMC’s willingness to act pre-emptively, even in the absence of glaring signs of an economic downturn, the most plausible scenario in our view is that the Fed continues to lower its policy rate by 25bp increments, while leaving the terminal rate above its long-term level, as long as inflation continues to behave. Yet, we also continue to think it remains very difficult to predict with any accuracy the Fed’s trajectory in 2025 before the US elections, given the binary nature of the policy proposals in terms of inflation risks. On the other side of the Atlantic, we think the most plausible trajectory for the ECB is to cut by 25bp increments at every Council meeting until June 2025 and the neutral rate, close to 2%, is hit. For the ECB to dip in properly accommodative territory, a “clear” recession would need to materialise. There is still a chance this can be avoided.
We also take a hard look at Switzerland. Indeed, while the ECB would still retain some decent room for manoeuvre to avoid having to resort again to unconventional monetary policy instruments even in case of full-blown recession, the SNB may not have that luxury. Another “balance sheet ballooning”, triggered by massive FX intervention, could be necessary there once the meagre room left for rate cuts is exhausted.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.
Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.